Robots May Have Caused Monday Afternoon Rally

by: The Housing Time Bomb

Wow, what a day. Folks, I lose more and more confidence in the stock market with each trading session. Stocks rallied hard yesterday afternoon after plunging yesterday morning as the European debt crisis continues to unravel.

I was really surprised by the late day stock market rally. The only plausible reason the market rallied was a result of more cheap POMO money from the Fed.

Let's take a look at yesterday's tape of the S&P futures. I wanted to use the ES because I want to discuss the volumes seen at the bottom of the chart:

(Click to enlarge)

My Take:

Personally, I don't believe yesterday's pump was mainly POMO related. In fact, recent POMO's suggest that POMO is starting to lose it's mojo as the Fed's cheap funny money liquidity becomes overwhelmed by scared market sellers who see Europe on the brink of a catastrophe.

The problem we have today is the market becomes much easier to manipulate when the volumes are anemic and dominated by trading robots. The lack of participation from the public due to a lack of confidence in the markets has made them very vulnerable to the volatile price action like we saw today.

Let's get real here: There was no real fundamental reason for the market to rally. The European markets closed at their lows. The debt crisis continues to spiral out of control.

One might suggest that yesterday's rally was a result of money moving out of Europe and into the US. Perhaps, but the move higher wouldn't have been so violent and late in the day. The European markets were closed by the time the rally started.

IMO, yesterday afternoon's move higher has trading algo manipulation written all over it because it was so fast and violent. The way I see it, once the buying got started, it triggered a series of buy orders by the robots who are all basically programmed to look for the same price action.

Once the S&P recovered to a specific level they began selling and taking profits. This is proven by the huge spikes in volume at the end of the day. Scroll back up and take a look at the bottom of the ES chart at both the beginning of the afternoon rally and then look at the ensuing spike right before the market closed as the robots took profits.

The volume was nonexistant after the intitial sell off for the whole day until the violent reversal. Why did everyone start buying and then later selling the market all at once within minutes of each other?

If this were individual human investing you would never see such coordinated buying and selling at the same time like this. You would see a more slow and steady increase in volume as traders started sniffing out a rally. These violent moves prove to me that this whole market is nothing but a computer generated sham.

Seeing any rally following what happened in Europe yesterday is ridiculous from a fundamental standpoint.

The 10 year Spanish bond remains in a virtual freefall as the bond market continues to sell off their debt in an attempt to force the EU's to play it's hand when it comes to a Spanish bailout:

(Click to enlarge)

I don't see this sell-off ending anytime soon until Spain and Portugal are dealt with by the EU, IMF, or the ECB. The problem of course is Spain. If they go down we are all in deep trouble. Their economy is larger than Greece, Portugal, and Ireland combined. Good luck backstopping that!

Here is something else that is beginning to worry me. Below is a chart of oil prices:

(Click to enlarge)

One must ask oneself why oil is surging as the dollar continues to strengthen? We all saw what happened to the consumer in 2008 when oil started getting up close to $100.

Gas was once again over $3 a gallon when I filled up today. Oil might become the Grinch that stole Christmas if this trend continues.

The Bottom Line

The market continues to become more and more erratic. I have zero confidence in what is going on at this point. All of the POMO funny money and zero-interest rates have turned the markets into a chaotic mess.

Europe is an absolute disaster. Keep in mind that Ireland has to get their budget approved next week by the country's parliament. You can be assured that there will be angry masses that will attempt to get this bailout blocked.

The Irish realize that this is a bailout for the bankers and not Ireland that they are being forced to pay for. The Irish have a history of violence when they feel they are getting screwed. Stay tuned on this one.

Keep an eye on Spain and Portugal the rest of the week. The way I see it, the Irish bailout will settle things for days or perhaps a few weeks before the rest of the PIIGS have to be addressed.

I'll end this with an excellent video that discusses this very topic: